Social Security helps support tens of millions of Americans in retirement. Because of how important Social Security benefits are, you can't afford to make any mistakes about how the program works and how you can get the most out of it that you can. In particular, these must-know facts about Social Security are often misunderstood, leading to critical errors that can result in getting lower benefits than you're entitled to receive.
1. Social Security payments vary depending on when you take them
Most people understand that you can claim your Social Security as early as 62 or as late as 70, and when you claim can have an impact on how much money you get. Yet even though the mechanics are simple, many people don't understand them. For starters, know that your "primary insurance amount" is the monthly benefit you're entitled to receive if you claim Social Security at your full retirement age, which for those retiring now tends to be between 66 and 67. The Social Security Administration calculates your PIA based on your lifetime earnings and the year of your birth.
If you claim benefits early, then you lose a certain percentage of your PIA based on how early you claim. Up to 36 months early, you'll lose 5% of your benefits for every nine months that you're early, while shorter periods result in pro-rated decreases. If you claim more than 36 months early, then you'll lose an additional 5% for every 12 months that you're early in claiming them. That makes the maximum possible benefit reduction 35% (for those whose full retirement age is 67 and who claim at 62).
Those who claim their own retirement benefits late get a bonus of 2% for every three months that they wait beyond their full retirement age. That comes to a maximum bonus of 32% (for those whose full retirement age is 66 and who claim at 70). These bonuses aren't available for spousal benefits but only for benefits paid on your own record. By understanding these provisions, you'll be better able to calculate the impact of various options on your finances.
2. Your claiming decision can affect benefits for your entire family
Your family members may be entitled to Social Security based on your work history under certain circumstances. This is most common for spouses: If you're married, your spouse may be eligible to receive up to 50% of your primary insurance amount as a spousal benefit. However, other family members, such as children or parents, may also be entitled to benefits.
In order for these family members to claim their benefits, you usually must file for and receive your own retirement benefits. In the past, alternative strategies allowed workers to file for benefits but then suspend them, opening the door to spousal and family benefits while letting the worker put off their benefits and thereby earn delayed-retirement credits. With the repeal of the file-and-suspend rule, that's no longer an option, so families have to weigh the impact of having a worker delay benefits against the ability of other beneficiaries to get payments.
3. The government can take away some of your Social Security benefits in some cases
The laws governing Social Security provide for several instances in which benefits can be lost. If you claim Social Security before reaching full retirement age and while you're still working, then you may start forfeiting part of your benefits if you earn more than $16,920 per year. Those who worked for public employers with their own pension programs can end up losing money because of the provisions of the Government Pension Offset and Windfall Elimination Provision.
The government may also take away part of your benefits indirectly through taxation. If you receive Social Security benefits, and the sum of half of those benefits plus your other sources of income exceeds certain thresholds, then a portion of your Social Security income is treated as taxable income and therefore boosts the amount of tax you'll owe. It sometimes makes sense to defer taking Social Security benefits if you know that claiming them now will leave you open to losing some of those hard-earned monthly checks.
Be ready for Social Security
Claiming your Social Security benefits at exactly the right time can be tough, especially if you don't have extensive financial assets to supplement those benefits. Nevertheless, it's worth the effort to learn what you can about the program and the strategies that will help you get the most from it.